How Three Speeches Could Influence Europe's Future

Three speeches in two weeks are likely to shape Europe's destiny for years to come.

The first came last week when European Commission President Jean-Claude Juncker delivered his annual state of the union speech to the European Parliament in which he set out his agenda for the European Union over the next 16 months.

This included eye-catching initiatives such as a plan to merge his job with that of Donald Tusk to create a single president of the EU Commission and Council, the creation of a eurozone finance minister, deeper European defense cooperation, the creation of new EU agencies to monitor national structural changes and the application of EU labor rules and new incentives for all remaining EU member states to adopt the euro.

Mr. Juncker's speech inevitably provoked accusations of a Brussels power-grab, supposedly justifying warnings not least by Brexiters of the EU's inevitable drift toward federalism and the creation of an EU "superstate." But this misses the point.

Mr. Juncker's speech was as interesting for what it didn't contain as much as what it did. For this to have been a major step toward federalism, there would have to be a major transfer of power and resources to the EU. Yet there was no mention of plans to give the EU new tax-raising powers, or the ability to issue its own debt. Nor was there any mention of a recently floated Commission proposal to pool risks via common EU-wide unemployment insurance. Another idea to create a European safe asset by offering joint guarantees of sovereign-bond backed securities appeared in the Commission agenda only as an idea meriting further "exploratory work."

Most of Mr. Juncker's proposed institutional changes simply involve beefing up the way in which the EU exercises existing powers. His plan to turn the European Stability Mechanism -- the eurozone's bailout fund -- into a European Monetary Fund didn't specify any new powers to accompany this name change. Nor did he say what new powers if any should be wielded by the proposed new eurozone finance minister. He did suggest some new functions that could be performed by the creation of a new eurozone budget line in the overall EU budget line. This included using the budget as a backstop to the banking union. But he didn't propose a radical increase in the size of the budget necessary to turn it into a credible crisis-fighting tool.

That in turn puts the spotlight on a speech that Emmanuel Macron is expected to deliver on Sept. 26, two days after the German election. Until now, the French president has sided with those economists who believe that a decisive move toward deeper eurozone fiscal integration is vital to cushion the currency bloc against a possible shock from Italy that many fear could strike at any time.

Yet French government thinking may be shifting: Officials now emphasize the importance of structural overhauls by national governments -- including further moves to improve the functioning of the eurozone banking system -- to boost productivity rather than pooling of risks as the key to strengthening the eurozone. Mr. Macron may still push for a big eurozone budget but the government has yet to reach a decision on how it thinks this should be funded and what it should do, say people involved in the discussions.

If Mr. Macron does scale back his ambitions then eurozone reform may not progress much beyond the limited overhauls proposed by Mr. Juncker. That would please Germany, which believes that there is little the EU can do upfront to minimize the risks of a possible Italian crisis and that any consequences can only be addressed as they arise -- even if that means living with a more vulnerable eurozone.

Meanwhile another potential shock stalks the EU about which Mr. Juncker had nothing to say at all. His decision not to discuss Brexit was supposed to convey confidence that the U.K.'s decision to quit the EU doesn't represent an existential threat to the survival of the block. But this show of confidence hides deep anxiety in some European capitals at the way that the negotiations are going. Significant interests are at stake in terms of cross-border investment, supply chains and trade and there is an enormous mount to negotiate in the 18 months before the U.K. leaves, notes one senior French official. Yet the negotiations are currently stalled in a standoff over Britain's outstanding financial obligations and the sequencing of talks, raising the prospect of a destabilizing chaotic exit.

Prime Minister Theresa May will attempt to unblock this process with the other big speech of the fortnight in Florence this Thursday. But the prospects for a significant breakthrough look slim unless Mrs. May is prepared to signal her willingness to go some way toward meeting the EU's financial demands and accept its insistence that "sufficient progress" must be made on settling the U.K.'s obligations before talks on a future trading relationship can begin.

Her task looked even harder following an intervention by foreign secretary Boris Johnson over the weekend that suggested cabinet divisions over how to handle the negotiations. A collapse in the negotiations leading to a chaotic British exit from the EU would be highly destabilizing both economically and politically, not only for the U.K.

The EU may be more vulnerable to shocks than Mr. Juncker may be willing to admit.

Write to Simon Nixon at simon.nixon@wsj.com

(END) Dow Jones Newswires

September 17, 2017 13:30 ET (17:30 GMT)